Recognizing that their investment portfolios have not performed as they anticipated, some seniors are exploring reverse mortgages as a way to provide some retirement income. A reverse mortgage is a loan available to older homeowners (62+) that allows them to address their retirement needs by converting part of the equity in their home into tax-free income, without having to sell their home, give up title, or take on a new monthly mortgage payment. Borrowers can use the funds for any purpose but many use it as a source of standby cash reserves for unanticipated expenditures, discretionary spending or other needs that do not fit their ordinary retirement cash flow.

The most popular reverse mortgage is the Home Equity Conversion Mortgage. It is insured by the federal government under a program developed by the Federal Housing Administration for the Department of Housing and Urban Development. According to HUD, 2002’s pace has been running at an average of 1,065 loans per month—up 64 percent over the last fiscal year.

Reverse borrowers make no monthly payment on a reverse mortgage during its term (the average is 11.2 years). The loan comes due when the borrower permanently moves out of his or her home. However, seniors can outlive the value of their home without being forced to move. The homeowner cannot be displaced and forced to sell the home to pay off the mortgage, even if the principal balance grows to exceed the value of the property. It the value of the house exceeds what is owed at the time of the homeowner's death, the rest goes to the estate.

For more information about specific reverse mortgage products and the process of getting one, contact the National Reverse Mortgage Lenders Association at http://www.reversemortgage.org.

Source:  National Reverse Mortgage Lenders Association, October 2002.

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January 2003